Liquidation costs and capital structure

Liquidation costs and capital structure We investigate the relation between liquidation costs of assets and composition of capital structure for firms that reorganized under Chapter 11 of the Bankruptcy Code. Firms with high liquidation costs emerge from Chapter 11 with relatively low debt ratios. The debt of these firms is more likely to be public and unsecured, and to have less restrictive covenant terms; these firms are also more likely to raise new equity capital. Assets with high liquidation costs thus lead firms to choose capital structures that make financial distress less likely. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics Elsevier

Liquidation costs and capital structure

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Publisher
Elsevier
Copyright
Copyright © 1995 Elsevier Ltd
ISSN
0304-405x
DOI
10.1016/0304-405X(94)00825-L
Publisher site
See Article on Publisher Site

Abstract

We investigate the relation between liquidation costs of assets and composition of capital structure for firms that reorganized under Chapter 11 of the Bankruptcy Code. Firms with high liquidation costs emerge from Chapter 11 with relatively low debt ratios. The debt of these firms is more likely to be public and unsecured, and to have less restrictive covenant terms; these firms are also more likely to raise new equity capital. Assets with high liquidation costs thus lead firms to choose capital structures that make financial distress less likely.

Journal

Journal of Financial EconomicsElsevier

Published: Sep 1, 1995

References

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